With the outlook for the global economy improving, the metals market is anticipating further price gains, especially in the second half of the year. The positive relationship between economic growth and metals consumption is of course well established.

From less than 3 percent in 2016, global GDP growth is set to witness a modest pick-up in the current year, to 3.3 percent, and further on to 3.6 percent in 2018.

Q1 is usually the lowest point in the growth trajectory and from here on markets are poised to improve, according to analysts.

Even in Q1, driven by strong demand (especially manufacturing and infrastructure spending in China) and supply constraints, metal prices surged 10 percent. For instance, iron ore was up 20 per cent on strong steel demand and low stocks in China.

With the expectation of a healthy rebound in economic activity in the second half, the base metals market is set to tighten and prices are poised to improve further.

“Metals prices are projected to rise 16 per cent in 2017 amid a tightening market for most metals,” the World Bank said in a recent report, adding that a combination of strong global demand, a slow ramp-up in new capacity, tighter environmental constraints and policy action to limit exports will come into play.

But the outlook is not without risks. A fed rate hike, outcome of European elections and impact on the euro and crude oil price movements will impact the outlook in varying ways.

In the event the Fed chooses to hike rates again in June (it will be date dependent, but the odds of a hike are rising) the dollar is sure to get stronger from the current levels and cap the upside for metals prices.

The policy pronouncements of US President Donald Trump (corporate tax cuts, large infra spend etc) are being closely monitored. In the second half of the year, there will be increasing evidence of the success or otherwise of his policies, which is sure to induce volatility in the metals market.

Without doubt, China is the mover and shaker of the world metals market. China has been destocking due to a credit squeeze; but there is expectation that the credit squeeze will soon ease and the restocking cycle will emerge in the second half.

Indeed, China’s fixed asset investment is running strongly with marked improvement in private sector investment. If the policymakers in the Asian major decide to provide more stimulus, demand can surge.

While world demand looks positive, it is the supply side that will be the differentiator. The world metals market will surely be sensitive to the potential of supply disruptions.

Zinc, lead and copper are three base metals widely expected to register price gains this year. Essentially a supply side story, zinc seems to be already in a bull market with mine cutbacks and closures. Copper fundamentals too are set to tighten following mine supply disruptions due to strikes and floods.

However, there is at present a scrap glut that will take some time to work off. The World Bank has forecast a 32 per cent rise in zinc prices this year and 18 percent in case of copper and lead.

In 2016, world steel production rose 0.8 per cent to 1,628 million tonnes, of which China accounted for 50 per cent or 808 mt. While world steel demand is set to continue to expand modestly into 2017 and 2018, supported by firming growth in emerging markets, China clearly holds the key as it accounts for 45 per cent of demand. So, a policy change in the Asian steel behemoth is sure to impact consumption and prices.

The writer is commodities and agribusiness specialist. Views are personal